Panel III: Electronic Disclosure

1999 Municipal Market RoundtableOctober 14, 1999 Washington, D.C.

United States Securities and Exchange Commission Office of Municipal Securities

Moderator McGuire: I'd like to welcome you all back to the First Annual Municipal Market Roundtable sponsored by the Office of Municipal Securities and the rest of the Commission. This afternoon's topic is electronic disclosure. And I think it's a very interesting one. I'd like to first ask the panelists to introduce themselves so that they can state their affiliations and favorite accomplishments. And we'll start with the underwriters.

Ms. Becker: I'm Joanne Becker and I'm a banker at J.P. Morgan. But I've been a research analysis, underwriter and trader at different points in my career. And I'm also chairing a task force on electronic information delivery for the Bond Market Association.

Mr. Marsh: I'm Ward Marsh. I'm in charge of the Municipal Securities Division at Salomon Smith Barney. I have a hard time saying Salomon. I apologize to anybody here. And I spent most of my career on the distribution side, mostly on the institutional sales side. But I will try to address the banking issues as well as the capital market issues the best that I can this afternoon.

Mr. Vislosky: I'm Mark Vislosky with Fiscal Advisors. My background is accounting. I do part-time work as controller for the Town of Salinas. So I'll be wearing two hats today if anybody cares to ask.

Moderator McGuire: Following the tradition of the last moderator, first of all I'm Catherine McGuire, I'm the Chief Counsel with the Division of Market Regulation. And onbehalf of the SEC panelists I'd like to reiterate our disclaimer which is that the views we express today are our own and not necessarily those of our colleagues or the Commissioners or anyone else really.

Mr. McAlevey: My name is Michael McAlevey. I'm the Deputy Director of the Division of Corporation Finance. Prior to joining the staff I was a partner at Alston & Bird in Atlanta where I did primarily corporate finance work and M&A transactions. A lot of – although in this area 10(b)(5) is really the concern as opposed to Section 5, there is a lot that the staff of the Division of Corp. Fin. is doing in the electronic area that I think has a lot of crossover applications.

Mr. Hoadley: I'm Frank Hoadley, Capital Finance Director for the State of Wisconsin. I'll be representing the viewpoint of a bond issuer.

Mr. Taylor: I'm Kit Taylor, Executive Director of the Municipal Securities Rulemaking Board. The board has had a longstanding interest in trying to facilitate disclosure throughout the municipal securities industry. And we would love to see more and more of it electronic.

Moderator McGuire: I'd like to start with Joanne and ask her to describe how underwriters are using the electronic disclosure to fulfill their various responsibilities under Rule 15c2-12.

Ms. Becker: I think the first thing is that electronic content is a bit of a problem at this point. And where we've been able to get electronic documents I think thestreet is using them to fulfill marketing obligations or opportunities. So basically what we're doing is we're distributing official statements for POS's but we're not using them for official – final official statement purposes mainly because we just don't have the electronic infrastructure to be able to deliver and keep track of the compliance requirements. But I think that's going to change over the next year.

Where I have seen a lot of change is using electronic documents for working group purposes. And we had a NABL session in Chicago. Last year I asked the audience for a show of hands as to how many people were using documents, electronic documents for working group purposes and maybe there were five or six hands. This year I asked the same question and about three-quarters of the room raised their hand. So I think that's a major difference.

I've used – I've out sourced electronic documents. Hired Thompson to distribute them for marketing purposes. We've converted documents into HTML ourselves and distributed them. We've used them for private placement purposes. But I don't really see a great deal of this being done in the market. And I think once we have the infrastructure available for G-32 purposes that will really change. At this point, you know, there's a limited incentive for issuers to provide the content until they really see the benefits, which are primarily in the speed of access and reduced FedEx charges and reduced printing costs.

Moderator McGuire: Ward, do you want do, could you comment on the timeliness of this stuff? Do you have an infrastructure to actually deliver information to customers electronically for those who would like it or how are you set up to do that?

Mr. Marsh: Well, I'd like to add one other thing. I think that Joanne basically hit on the I think electronic disclosure has moved much more slowly than we all would have liked. And I think it has a lot to do with the motivation of the issuers or lack of motivations. And the one thing I think would get to the key force to get them to embrace this is the notion that they could broaden their market and I think beyond the impediments.

I also think that with the exception of some very motivated issuers who want to be the first to do it in an electronic format there aren't – you've got bankers who, God bless them, are overworked at this point in time that this would just add to their menu of things that they have to do. I think that it takes more lawyers hours to review both the cellulose document and the electronic document, so they avoid that.

And I think there's also the issue of the incorporation of feasibility studies and audited financials which typically arrive not in what I will call a native – or a native PDF form but rather in a bit map format. And I think there's always some dynamic tension about the inclusion of their documents in the half native/half bit map format. There are impediments that I think are surmountable, but at this point we need to provide motivations short of an angry boss because they want to be the first on their website to have more archived final OS's.

In terms of timing when it's an infrastructure, I don't think that there is a whole lot of infrastructure. I think, again, it goes to motivation. I mean if you have native PDF files, we have at our firm a retail site which when we have POS's or final OS's we make available there. We have an institutional site. So if we've got it the great beauty in electronic disclosure is that it's instantaneous. And I don't think it takes a lot of infrastructure to do it other than getting the infrastructure that we employ on deals to do it in an electronic, and again I underline, native format.

Ms. Becker: Can I just ask a quick question?

Moderator McGuire: Yeah.

Ms. Becker: Ward, are you keeping track of informed consents for retail clients and institutional clients?

Mr. Marsh: In terms of delivering on an electronic basis?

Ms. Becker: Uh-huh.

Mr. Marsh: I would tell you that if we have any I could count them on one hand. I don't think we've solicited it and I don't think it's a large part of our business.

Ms. Becker: Because that's really what I meant by, you know, the infrastructure. The system that we're working on basically would enable investors to come in and literally go on the screen, give their informed consent which is, of course, subject to revocation, and then to download the file. And it sounds very easy but actually it took a lot of programming time. And it's not finished yet.

And I think one of the problems has been everyone has been so concerned with Y2K compliance that, you know, you start talking about electronic OS's and they say, Go away. You know?

Moderator McGuire: I think you've highlighted a lot of issues. And I think Mike might want to react and I think some of the issuers and lawyers might too. Why don't you go ahead.

Mr. McAlevey: Yeah. I think that in the corporate world with respect to more traditional, you know, corporate financings I think that, you know, there we've seen plenty of examples of people being much more ready to adopt the new technology and to use electronics to accomplish their delivery requirements under the securities laws. So, you know, I think – I'm confident that things are going to move in this direction pretty quickly.

One of the – another point that's consistent with one of the criticisms that we're hearing of the existing system that we have for electronic delivery is many of you know from those releases in the mid-'90s that the Division, that the Commission issued on electronic delivery there is a model for touchstones that need to be touched in order to accomplish electronic delivery.

There is this concept of notice, access and evidence of delivery. And the point about consent and the difficulty to get that, in getting that consent and tracking consents comes up in the evidence of delivery requirement. There we basically said that there's a number of ways that you can demonstrate that the document has indeed been delivered. One of those is to get an informed consent. And many underwriters and issuers, people with delivery obligations under the securities laws have said to us those mid-'90s releases are helpful, however, it's the difficulty in getting that informed consent which is really slowing the process down.

Our thought on it is that it would seem fairly easy to get the informed consent, you know, either to seek it through and e-mail, seek it through cellulose, some way to get it. This is the first I've heard of the approach that you all are developing which is to just have on the website, you know, here, please provide us with your consent. And once you've provided us with that consent you can click through to the document. I think that that's, you know, an interesting way to resolve the problem.

Mr. Fippinger: Mike, on the corporate side the evidence of delivery, has that been problematic?

Mr. McAlevey: When you say "the evidence of delivery" what aspect of it do you?

Mr. Fippinger: Being able to demonstrate that the document is actually delivered to the investor.

Mr. McAlevey: Well, I think that that is a challenge in the paper world as well as it is in the electronic world. There is no requirement that there is actual evidence that the document has arrived, you know, and the person has picked it up and read it.

We haven't, people generally haven't had a problem with the evidence of delivery prong of this. I mean, for example, we all know that with e-mail you can have return receipt requested.

Mr. Fippinger: Right.

Mr. McAlevey: That's a fine way to be able to do it. Another way that was recognized in those mid-'90s releases was if you connect to a document that is hyperlinked to the information that is required to be delivered that would satisfy it.

And this informed consent was just one way to satisfy the evidence. That, however, has sort of become the central concern. And we've received plenty of comments about how to remedy this.

One suggestion that we're thinking about currently is a model of implied consent. Today the requirement is that in order to use the informed consent to satisfy that prong of the electronic delivery test is to actually receive back from the person affirmative consent, that is, you know, the
investor or the person to whom the document is sought to be delivered needs to actually get back and say, yes, please deliver to me that document electronically.

A lot of people are saying that is the hard part, getting people to get back to us. How about this? Why don't you just sort of flip the presumption and say if the person who is attempting to fulfill their obligation of delivering sends a notice to the person and says, We are going to deliver the document to you electronically unless we hear back from you. So the inertia is going in the other direction now, that if the person doesn't get back to the person with the delivery obligation then, you know, they can – then sending it electronically they can assume that their obligation has been satisfied.

It's an interesting idea. Obviously there are some investor protection concerns that we have about that. But that's one of the ideas people have.

Moderator McGuire: But it is important too, isn't it, to note that the consent goes to evidence of delivery, so if the person actually gets the document there's no need for consent; is that right?

Mr. McAlevey: That's correct.

Moderator McGuire: Frank, I thought there were some questions about issuer incentives. Could you talk a little about that in terms of whether you see an incentive to provide information electronically?

Mr. Hoadley: Well, clearly we see an incentive from the standpoint that we think that electronic preparation and dissemination of our documents makes our documents more widely available faster. And while I know that there are views to the contrary, we think that the majority of those users of those documents find the electronic documents more convenient to use than the paper documents.

With respect to the delivery and consent issues, for the most part these are questions and issues that don't affect issuers directly because we only have very limited delivery requirements. We have to deliver the official statement to the underwriter and we have to deliver certain disclosure documents to the NRMSIRs. Beyond that it's a real problem created by the regulatory environment to prove the delivery to investors. But we don't have a role in solving that particular problem at this time.

Moderator McGuire: Mary, did you want to comment on the usefulness of electronic documents and your access to them?

Ms. Miller: I think that I would probably separate my comments into sort of the front-end issues of the primary market and receiving preliminary OS's electronically. And the other area might be the secondary market and the types of information available electronically there.

We think right now we're getting about 10 percent of our official statements electronically. And I might just introduce some of the practical problems we face getting them that way, if I could.

Just to step back for a minute and talk about how we work. In any week we might see $3 to $4 billion of new issues and we frequently don't know which ones we'll be finally interested in until we see the pricing and structure of the issue. As a practical matter, at that point if we want to begin doing research on it and we want to take it off the internet the first thing the analyst does is hit the print key. I've yet to meet an analyst who enjoys reading a 200-page document on a computer screen.

So we'll spend some time printing. And it's still one-sided printing. A lot of documents being printed at the same time. Most of these issues are priced on Tuesday or Wednesday, so we can have sort of printer gridlock with a lot of paper being printed.

But the bottom line right now, and I can see some things changing with time, is that we still seem to need hard copy on these documents. We can get them more easily electronically, and I think the burden of printing is being shifted to the investor, and I don't think we have a problem with that. But there are still some practical issues on the front end.

I'll just offer that.

Mr. Marsh: Mary, can I ask a question? One of the true advantages I think to electronic disclosure on a preliminary OS basis is that very often we are forcing deals into the market. And if there is something complex about the credit we often hear complaints, well, the POS just arrived and you're pricing it at 11:00 o'clock this morning. Of the10 percent of the documents you get have you been advantaged on a timing basis in that regard or is it just simply the delivery mechanism? Has it gotten there a day earlier because it was electronic? If you'd waited for the FedEx would it have, you know, pressured you into making a quick decision or a decision not to buy at all?

Ms. Miller: We were trying to figure that out. And there isn't one answer either way. Some of the OS's we are getting early electronically, and that's great. Others are arriving day of or, you know, along with the mail with the other more traditional means of disseminating OS's.

So I can imagine it become a better tool if there is consistency in early delivery of the POS's, but we have not seen any clear pattern of them coming in a lot earlier because they're electronic.

Mr. Taylor: Can I also ask, Mary, I just want to make sure everyone in the audience understands or at least maybe just me needs to understand, but you are really talking about POS's?

Ms. Miller: Yes.

Mr. Taylor: You are not talking about final OS's which are the subject of the delivery requirement to customers after the deal is sold?

Ms. Miller: Yeah. I wanted to make that clear that really this is front-end, primary market, new issues, preliminary official statements.

Mr. Fippinger: Are you seeing any final official statements delivered electronically?

Ms. Miller: Yes.

Mr. Hoadley: And a further question, do you consent to that delivery as an investor?

Ms. Miller: You know, I'm listening to that. I have not personally consented to it. I have to go back and ask our analysts if they are consenting when they get that. I don't know the answer to that.

Moderator McGuire: Are there any other questions about the front-end POS process? I guess I still would like to know whether – maybe Mark you would know, you might work with more issuers – whether you can see a way to make issuers be more interested and what hurdles there are to be having this be used more widely?

Mr. Vislosky: On a yearly basis we average around 300 issues a year. And out of that amount about 150 would be POS's that we would put on our website. But we do not preempt the normal mailing of the POS and notice of sale as we have always done because we're looking at it from a generational standpoint that even though the technology is there and we can go light speeds with delivering electronically, you still have a large segment of the population that is not a large issuer, that is not a large institution, that does not have access to electronic data.

So to kind of more speak to the point, a lot of our issuers are small issuers. On average it's $3 to $5 million per issue. And the benefit that we saw initially and when we tracked it is that we were receiving hits on the website from as far away as Great Britain, from American Online servers. Now, we couldn't weight the benefit as to whether people were just surfing the net and happened upon this information or if they were true downloads and that people were actually taking the information and making some kind of value judgment on that information.

But we looked at it as more of a, for lack of a better term, a marketing approach. How can we better get issue, the smaller issuer out there to gain the best market for them? But at the same time, we realized that there were still some concerns with delivering the final or rather the preliminary official statements to the underwriters and the notice of sale concern.

So we're still playing both sides of the fence, if you will.

Moderator McGuire: I don't know when the best time to introduce the MSIL system and the NRMSIR system is, whether it would be good to discuss it now or whether we should go through the periodic and material event notice discussion first and then go to that.

Mr. Taylor: Well, if you want to wrap up this part of – I mean what we've talked about right now is sort of the new issue process. And, you know, we can sort of deal with that and then move on to the secondary because I think in some ways the issues are different.

Ward I think has really picked up on one of the key things, and I was talking to Mary early on before the panel began, one of the biggest problems about electronic delivery just of the pure practical consideration, electronic delivery over the net or through an attachment to e-mail of an electronic document is its size. And when Ward says produce the thing in native PDF, you're trying to get the thing down under a meg if you can possibly do it. The smaller you get the size of the file the better off you are.

A lot of the stuff that we've seen or heard about is really what Ward calls bit mapped, which is just take a picture of it. And those files are huge and really aren't – they're similar to what we actually do with the official statement when we get it in, in a hard copy form. We basically take an electronic picture of each page. That really in the long run is not something that's going to be transmitted or easy to transmit.

We really need to go back to what Frank may be doing which is producing the original document all electronically, including the financials, including the engineer's reports, including all of the maps that go into a final OS. That's really when we'll be able to speed the whole thing through the process.

Mr. Marsh: And various analysts might even be able to read a native PDF on their screen.

Mr. Taylor: Right.

Mr. Marsh: Save it free.

Moderator McGuire: Bob, when do you think that's going to happen? You deal with these issuers. I know you're there as the lawyer when you write the documents but --

Mr. Fippinger: Well, let me answer that by commenting on some things that came out in the last panel. I think that the lawyers who are advising issuers, particularly with websites, should be encouraging them to use the websites in emphasizing the positive features of the websites and not the risks. The fact is they're beneficial to issuers, they're beneficial to investors. The regulatory environment for website and electronic delivery is very favorable.

And as I think as this panel develops the theme we're going to find that the website solves more problems than it creates. So I'm very much in favor.

Mr. Taylor: Do you want to take up websites right now?

Mr. Fippinger: All right.

Moderator McGuire: That's fine with me. Why don't we start with Frank. And you're the one with the website, so maybe you could tell us a little more about what caused you to develop it and what works for you and anything else you think that would be helpful to this group?

Mr. Hoadley: Well, our website is we think one of the most comprehensive around in terms of sending the needs of the capital finance function of the state of Wisconsin. Examples of the information which is on our website today include such things, for example, as RFPs for financial services. And a new variant on that is that once the RFP is delivered to a proposed service provider in electronic format we expect the proposals also to come back in electronic PDF files. So we actually receive the responses back electronically also.

We recently went through an RFP process for financial – for investment banking services. And, frankly, the savings in time and effort receiving those proposals back mechanically at our end was phenomenal.

We also post all of our competitive sale documents, including the notice of sale and the preliminary official statements. We produce a separate and special annual continuing disclosure report. That document is available on the website.

And as a footnote to that document, that document is incorporated by reference in all of our other official statements. So when you open up an official statement, be it a POS or a final OS, you will find hotlinks in the official statements to the most recent annual continuing disclosure report.

We also put on our website unaudited annual financial reports. Our 1999 unaudited financial report will be released tomorrow and will be available on our website. We don't consider that report in any way fulfilling our 15c2-12 requirements.

Our CAFRs are put on the website separately as soon as they are available. Again, we don't consider putting the CAFR on the website as satisfying 15c2-12 requirement. We look at fulfillment of our 15c2-12 requirement very narrowly by the filing of our annual continuing disclosure report which contains all of the elements necessary to meet the legal requirements. And that document is essentially filed at the end of the year six months after the close of the fiscal year.

We publish a forward calendar of our bond sales on our website. We also include every material event and information notice on our website, complete with any attachments that are usually associated with those events or announcements. We use the NRMSIR system and the material event disclosure system both for the 11 deadly sins as well as for other information releases which we think are material to investors.

And then, finally, we have links to other state agencies who have important economic information, including employment data and revenue collection data. And then we have an archive of the final official statements for all of our bond issues since 1995.

That's what we're doing with the website today. A question that frequently is asked is, well, how much effort does it take and how much does it cost to maintain such a website? The reality is everything that's going on, on that website are activities that we would be doing on paper anyway. We're blessed in the state of Wisconsin of having some very good technological resources in terms of an available website and available servers. But in terms of the additional effort and time and expense of putting it out there, there is no additional time or effort or expense in keeping a website current.

Moderator McGuire: Does it improve the timeliness of information do you think?

Mr. Hoadley: You're going to find the information on the website before you'll get it from the NRMSIR.

Mr. Fippinger: I think it's important to note that Frank's system has old official statements. And I would hope everybody on the panel would agree that the posting of old official statements does not carry with it a duty to update those official statements, that those official statements speak as of their date. They're not required to turn in to a movie. The hyperlink from the official statement to the continuing disclosure that Wisconsin has I think is very valuable.

But as to updating those official statements I don't think there is any duty unless there is an incorrect statement in them which there, of course, it's a duty, or a forward looking statement that requires being addressed.

Mr. McAlevey: I don't know if, you know, I don't know if I can necessarily – I think from a practical perspective you make a very good point. This is an area that I think not all the circuits are in agreement on, on this duty to update issue. And I am not aware currently – somebody else on the panel may be – of any judicial decisions on the application of the, you know, common law duty to update as applied to information on an issuer website. There may be cases out there that I'm unaware of.

Suffice it to say that I think there is uncertainty in this area. Having said that, however, we have observed a number of practices that, you know, I think, would reduce the risk of being subject to the duty to update the information on the site. One is the archiving. You know, if you have a separate, you know, as information ages your first point should be if it's information that speaks as of a date be sure that the document says that it speaks as of that date. And maybe even affirmatively put in the document you undertake no obligation to update the information. A header would be a nice thing to do in that respect.

And then on an ongoing basis, and this is where some cost may come into the picture, because you're going to have to have a live body looking at the website, but as the information ages to take it off the portion of, you know, another portion of the site and move it to an archive portion. And that archive, you know, a separate button that you have to click before you can get into that information. And as you go through that, you know, click on that you get a jump screen that says this is the archive section of this website, this is old information, please be aware. We undertake no obligation to update this information, it speaks as of the date, you know, at the top of the document.

And these are sort of precautions. Now, again, we're going to have to wait and see how these things turn out in the courts. But I think in the interim that there is some very helpful guidance out there on things that you can do to reduce the risk.

Mr. Fippinger: Yeah, I think the archiving is fine as long as it's easy to access. But there is a lot of information in old official statements that is important to the secondary market, including redemption provisions, covenants, remedies on default, tax information.

Mr. Taylor: Let me interrupt. Bob has raised a key issue: easy to access. Let me put the question to Ward. As it was discussed this morning in the secondary market panel, a block of bonds come in, are you happy with the idea of your traders going out and checking these websites and how practical is that from a dealer's point of view of finding out what the status is? Because that's exactly what we heard dealers try to do in the best world.

Mr. Marsh: We as a firm rely still on the telephone and on paper documents for the most part. What Frank has described is the – and I don't mean this in a facetious – but basically the poster child of an issuer's website. Unfortunately, the issuers that are more problematic, the issues that we would want to trade and want to be comfortable with in the secondary market, because of the complexity of their credits are probably, number one, not going to have a website because they're going to be afraid of the timeliness, accuracy of the information that they put up there.

So I don't think that we now, nor do I see in the very short future, the reliance on the internet for our credit analysts to go get timely information. I think that that still is going to be a telephonic event. If that answers your question.

Mr. Taylor: It's close enough in the sense that I was thinking of the other practical aspect of it is you have a whole bunch of people going out on the net, and the net isn't always very quick or very reliable unless you have super high speed connections and not too many people hitting those connections.

Mr. Hoadley: One point about the presence of the old official statements on our site. One of the factors we keep in mind in terms of what information we put on the site is to anticipate and respond to those questions which are most frequently asked. And one of the most frequent questions that we get is, Can I get a copy of some old official statement?

And the answer is, yes, we can mail you one or you can get it right now at this address. And we point the address out to analysts and others and then we say, Do you want a paper copy? And they say, Oh, no, this will be fine.

Mr. McAlevey: As a matter of fact, under the '95 releases dealing with electronic delivery that you're permitted to do electronic only offerings. And I realize that that's something that doesn't seem to have made it into the municipal market completely yet. But you need to keep in mind that even if you are conducting, if you're delivering documents electronically, you have to be prepared to deliver it in paper to people. If they call up and say, I want a copy, you've got to be able to deliver it to them.

So right now we have parallel systems in effect operating that you can use electronic, the electronics to fulfill your delivery obligations but you have to be prepared to deliver that piece of paper if it's so requested by the person to whom you have the obligation to deliver it.

Ms. Becker: I think also it's important to make a distinction between issuers using websites as extensions of their open meetings, laws, file cabinets and marketing purposes and make a distinction between that and the decentralized NRMSIR system that we have. And I think it's important that the websites end up not substituting for the NRMSIR system.

If issuers have, you know, true electronic data available it should be filed with the NRMSIRs. All the firms take subscriptions to all of these different products. And, you know, given the amount of time that you have to do due diligence for a secondary market trade, you don't want to have to go and do a website search if you can go straight to the CD ROM product that you're subscribing to.

And I think website development is something that we've really seen over the past two years. And I think, frankly, there's been an exponential growth in the number of sites. But, again, content is really the problem. And most of the content that's being delivered over the internet by the NRMSIRs and to a great degree by the issuer community are basically paper documents that have been scanned and are stored in PDF and are just simply image files that are being displayed. And there's a huge difference between having, you know, data that's been authored in an electronic format, Word, WordPerfect, HTML, native PDF, take your pick, but between displaying that and printing it and transmitting it and downloading image files.

Moderator McGuire: Joanne so that for the people who aren't so savvy with respect to the internet could you explain the significance of that? I assume that it has to do with size and cost and clarity and the ability to manipulate data. Maybe you could explain these terms to us.

And you can either author in those forms and convert them into PDF, which is it's still a text file but it's a much smaller file, it takes up much less space on a disk, it takes less band width in order to transmit it, and it's much quicker to download.

If you take, and this is primarily the reason why the NRMSIRs are using PDF, they're taking existing image files and taking paper, scanning it into PDF and then simply displaying it. And the problem is a picture of a page takes up an enormous amount of space on a disk. It uses a multiple in terms of band width in order to transmit it.

Consequently, it's much, much slower. And the same thing for printing, it just takes an awful lot longer to print it. And until we have, you know, text files – I mean everyone is producing the documents using Word and WordPerfect and Excel. It's out there. And that's, you know, eventually it's going to get into the NRMSIR system in true text format.

And I think that's the significance of working groups using electronic documents. Everyone's, you know, experimented with this and they understand the differences from practical, of practical experience, you know, trying to translate from Word into WordPerfect or read a file that's in a different version. And these are all things that have to be worked out. And I think we're going to see an enormous amount of change in the next year.

Moderator McGuire: Go ahead.

Mr. Hoadley: I'd like to just expand on this just a little bit more. And Joanne and I have discussed this topic in the past.

But we are concerned about some aspects of electronic disclosure and electronic files. And we feel that any electronic format is subject at any one point in time to corruption. And potentially to misinterpretation. For that reason, given those limited filings that we as an issuer have to undertake, believe it or not, we're Luddites, we file it and we make all those filings in paper.

On the cover page of each piece of paper or each document we file there is a legend which says this document is available electronically at this web address. So while all of our documents are available electronically in very friendly native format, we make the legal filing in paper. And that's to simply assure ourselves that that filing was made once and for all and it's exactly the same document we prepared.

Moderator McGuire: Kit, how does that fit with your idea of the future for the industry as a whole? Doesn't that have to change if anything's going to change?

Mr. Taylor: Well, several practical hurdles have to be dealt with. First of all, the drafting of the whole document in some sort of native format is absolutely essentially so that you get it down to manageable size. Much of the POS and much of the discussion about POS's or working groups really relies on the fact that that's the first 80 percent of the OS. It's the last 20 pages of the OS which has the engineer's reports, a copy of the auditor's letter and things like that that begin to create real problems because that's produced on somebody else's letterhead. And how do you – right now it goes into the OS as a photocopy. It's delivered to the printer not as an electronic WordPerfect file but as a print file, as a bit map.

Moderator McGuire: Frank, do you get that from your people?

Mr. Hoadley: Our contract with our auditors require them to deliver audit reports to us in electronic format, ready for use in disclosure documents.

Mr. Taylor: As Ward pointed out, Frank's the poster child. I think as a practical matter, then you get into the next step which is what Frank has talked about is how from the MSRB's point of view where we're trying to get a copy into a library and to store it for the life of the deal, how do we make sure that we've got the official copy or an official copy? Right now it's usually satisfied, as Frank points out, his official copy is paper. So my official copy has to be paper.

When Frank can get his bond attorney to say the electronic thing is an official copy too then the whole thing can work electronically.

Mr. Marsh: Can I just add one thing? One of the issues here, one of the advantages – I'm not trying to sell a product – but, Frank, you talked about the notion that every electronic form was subject to corruption. I think what we fear most is deliberate corruption. And to the extent of all the formats, John, you talked about PDF I think we would agree is about as immutable – nothing's immutable – but is about as immutable as all the formats we've talked about.

Mr. McAlevey: Is the reason for that that it's an image as opposed to text?

Mr. Marsh: It's not an image. No, it's not an image.

Mr. Hoadley: And I don't think that, frankly, you know, if you work with PDF files and then create PDF files you pretty quickly realize there are several security layers built into that software. And most people never go beyond the first security level. And from that standpoint I don't think that PDF is any more secure from deliberate tampering than almost any other file format is. I think it is more secure from accidental corruption than other formats.

Ms. Becker: I think there's a difference between, you know, providing security for a database and providing a document that is not – that is less subject to being altered. And I think all the NRMSIRs and the MSRB provide security and fire walls so that their databases can't be corrupted. But I think in terms of the ability of a person to download a file, make changes and send it off to unsuspecting retail mom and pop investors, you know, that's a whole other ball of wax. If someone really wants to commit fraud they can do it with a paper document. They just cut and past it.

And, you know, should we really expect that we can provide documents that aren't mutable? Shouldn't we look more towards the procedures that we have in place for delivering electronic documents? And if I'm a retail investor I don't think I want to get a copy of an official statement or a stock offering from my retail broker, I think I'd take a great deal more comfort obtaining it from a NRMSIR.

Mr. Hoadley: Incidentally, as far as the security issue is concerned the bit map file is more secure by far than any of the others.

Mr. Taylor: I think at the end of the day a lot of the practical problems can be resolved once you have a reason for people to do this all the way down the chain. Right now, when Mike McAlevey was talking earlier about what was going on in the corporate world I kept thinking, well, yeah, the form and content issues have all been pounded out by the Commission by direct rulemaking. We don't have that kind of luxury in the municipal world.

We're really up to what the issuer wants to provide to the industry or to the dealer community, and it's only going to happen when the dealer community can turn to the issuers and say here's how you can save some money. Or the dealer figures it out that it's really going to be a lot cheaper for them and they're willing to go through the work to do it?

Mr. Marsh: Or broaden your market.

Mr. Taylor: Yeah. Whatever. I mean there has to be some sort of economic incentive.

Mr. Marsh: Where we're going as an industry is the direct sales. You know, if we're going to create a transparent market and we're really trying to court this friendly marketplace you're going to have to create information that the consumer can use, which going to your point, there is not a person on the planet that has a 28.8 modem at home that's going to download a 150-page bit map
official statement. Just simply not going to do that.

So, I mean I think a lot of this centers around getting it user friendly for retail which might provide economics the issue is a broadening of their marketplace. And I think it does center ultimately around technology and that would be self-reinforcing.

Moderator McGuire: Mark, what's your sense of this?

Mr. Vislosky: Well, again, a large part of our issuers are small issuers. As an example, we're working with a village up in the north country, what we call the north country of New York, which is really up north. But it's a small issuer. It's going to be issuing about a million-and-a-half in sewer-related bonds. And they don't have a website. And in the near future they're not going to have a website because they really have no need. They don't have an economic base that will entice people to access the website.

What we find is a large majority of our issuers, which are school districts, have the greatest amount of technology. But in that example with the north country municipality we are taking on the role of trying to put a or an official statement on a website. Now, we don't foresee providing continuing disclosure, and it doesn't seem practical right now, providing ongoing disclosure on our website and acting as a conduit for them. We see the paper trail being a better mechanism at this time.

Now, for a larger issuer, sure, it makes sense. But I think for the rest of the country that are a large part of the small issuers it's just, we just don't see it happening that rapidly. And maybe I'm in too small of a market to see that. But, you know, the technology is there, sure, but unless you're a large issuer and you have the staff to be able to maintain a website and gather all this information and disseminate it out there it's just, it's not happening right away.

Moderator McGuire: What about the part about just preparing the official statement in electronically? And what would your fears or the fears of your clients be in terms of filing it with the MSRB electronically?

Mr. Vislosky: I don't think there would be any fears filing it. And it's, quite frankly, easy to convert from a Microsoft Word to a PDF and upload it onto the and then from there either transmit it to the NRMSIRs or directly from the internet.

Moderator McGuire: Bob, legal issues?

Mr. Fippinger: Well, Rule 15c2-12 is drafted so that everything can be done electronically. The only step in the process that requires a paper delivery is compliance with G-36 and the delivery to the MSRB after the sale date. So the law is in place to let it happen.

Moderator McGuire: And the MSRB I think also has an electronic delivery.

Mr. Taylor: We did not – we have it for customers, we didn't have it for 36 because at this point we hadn't seen anybody produce a complete document electronically. And more to my questions after this will be to talk to Mary about which documents she actually did get completely electronically because everything we've seen up to now it's only the first 80 pages that are electronic. People really aren't producing an official copy of the final official statement electronically. They're producing, you know, bits, parts, but not the final official statement.

I think, Kate, really in answer to an earlier question you had which is where is this going? The real
progress is actually probably not going to be as quick in the OS part of it as it is in the continuing disclosure. I see much more ability to deal with that issue, similar to what we're doing with the NCSHA, the National Council of State Housing Agencies, where the council sat down with investors and said, What do you want? A whole bunch of the housing agencies right now produce quarterlies, which are not required by 15c2-12, in easily downloadable formats, any one of the Microsoft products.

We take them in, we turn around and flip them instantly to, right now to anybody who's a test subscriber. And I can foresee the day when they go out and they go onto an FTP site or they go out to someplace where anybody can pull them down. But I think there's much more likely to be progress on a sector by sector basis in secondary market disclosure. And we look forward to working with various sectors in that regard.

Moderator McGuire: Frank?

Mr. Hoadley: I'd like to raise just sort of a side issue of a catch-22 with respect to MSRB filings. Issuers cannot make filings with the MSRB. The only people who made filings with the MSRB are broker/dealers.

At the same time, there is a hint in 15c2-12 guidance that in order to incorporate by reference financial statements or other information, that information should be on file with the MSRB. Because we incorporate very heavily by reference in our official statements, we have no first-hand knowledge or way of knowing whether or not the requisite referenced information is on file at the MSRB, and in most cases we suspect it's not because it's not official statement.

And so there is a sort a catch-22 that exists there and we tend to just look past it.

Mr. Taylor: Well, just for clarification, A) the Board cannot require issuers to file anything with us. Congress specifically prohibited us from doing that. The only thing the Board does get in the way of documents is the final official statement. And it is through the dealer community.

So we don't have all of the other things on your website that you would like to have as cross-reference because we would have to right a rule that says Ward has to give it to us in some fashion. And that puts an obligation on him that's not clear how it would work.

Moderator McGuire: Well, is that necessarily true? I'm just brainstorming here, which is always dangerous. Why we do that disclaimer thing at the front. But is there anything that keeps a dealer from delegating to the issuer to make the filing? I mean isn't it actually, I mean don't we have the team.

Mr. Taylor: I'm going to let counsel here to my right answer for me.

Mr. Fippinger: I think that's a good idea.

Moderator McGuire: I'm sure the dealers wouldn't mind.

Mr. Fippinger: Well, the Tower amendment does say that they can't do anything directly or indirectly.

Mr. Taylor: Right.

Mr. Fippinger: But if they are not involved and it is simply a contractual arrangement between the underwriter and the issuer but the issuer will do the filing, I don't think that's a problem under the Tower amendment.

Moderator McGuire: Go for it, guys. It's a great idea. It's mine. Of course, when it turns out to have problems, it was the panel's.

Mr. McAlevey: – for a minute before we move off the topic of website content. We kind of drifted away from that.

We touched upon it on the sort of the duty to update. But website content, I think of the duty to update as just a sub-issue under website content generally. I think that we recognize the importance of website communication.

We think it's a great thing. But I think that issuers and their counsel and the other participants in the capital markets need to understand that if you're operating a website and you're participating in the sale of securities, the offering and sale of securities, Section 10 and rule 10(b)(5) promulgated thereunder are, you know, alive and well. And they present some challenging issues for people as they apply to this new technology.

I think that, I think that most people can agree – I won't say that it's universally agreed upon, but if you have information that is directly on your website that you have anti-fraud responsibility for that information, basically you have made it your own, it's something that the issuer is actively, you know, putting out on its behalf, on its own behalf, 10(b)(5) liability would more than likely apply to that if all the elements of the claim could be established.

More difficult issues arise, however, when you begin talking about hyperlinking to other sources of information, issuer initiated hyperlinks or broker/dealer initiated hyperlinks to third party material. What is the liability there for, the 10(b)(5) liability there? Again, unclear. The court's haven't spoken on these points yet, to my knowledge.

However, again, you know we have observed a lot of practice that seems to make a great deal of sense to try to limit responsibility for information linked to the issuer's site. In essence, you know, you have to – I think it's really helpful to view it through the lens of the elements of the successful 10(b)(5) claim which is materiality, reliance and scienter. And what type of things, it's very common sensical, what type of things would help rebut the ability of somebody to establish these elements?

And ideas like jump screens, you know, exist screens or notices. For example, if you're moving into information off the site you just have a screen that says you are now leaving our site, and, you know, please be aware that, you know, we have not reviewed this information – or something to that effect.

I'm not going to give you a lot of comfort that disclaimers work. Okay? I don't know if they do. I think that there's a number of cases out there already that say that, well, maybe they don't work. But I think that the extent that you do some sort of jump screen or disclaimer exit notice, that helps. I think it's a positive factor that says that somebody can't really rely upon that information on that other site with respect to making an investment decision of the issuer security. I also think it goes to the materiality prong. Maybe, you know, somebody will say it's not material. I mean, look at this notice, I mean it was – you were told that you maybe shouldn't rely upon this. So it goes to the elements of the claim.

Control is really the, you know, a central consideration here. I mean to the extent that the issuer has control over that linked site such that they can dictate what is said on that link site, I think that is a bad factor. I think it would be very difficult for an issuer in a case to be able to establish that they are not responsible for that information if it can be established that they had control over that information.

I think that links on a non-selective basis, this comes up a good deal with analysts' reports, you see a lot of practical guidance being given out there about linking to analyst reports. Most people think it's a pretty good thing, you know, to put this, you know, put this information at the hands of the investors. One of the practical points that's made, though, is do it on a non-selective basis. What that means is that some, if one analyst is following your stock or your security or the company, the issuer, then try to list all of the analysts who are following you. And the reason is that that will prevent somebody from being able to say, ah-ha, you selectively provided a link to positive research as opposed to some negative research.

So the idea is to try to if you're going to link to these third party sources to try to do it as much as possible on a non-selective basis.

Another factor might be if you're just linking to a news service, sort of a general what I'll call library type where, you know, a Yahoo Finance or something like that where it's not, you know, it's information that anybody can get any time, it's not necessarily, you know, company specific. You know, that sort of thing I think would be a factor that would weigh against, you know, or would be, you know, evidence that you indeed, you didn't have control, that you weren't trying to take responsibility for the information and that sort of thing.

But I think it's very important to keep in mind that, you know, 10(b)(5) applies to this information on the website just as if it was in cellulose. You've got to be concerned about the information that you have on your own site and you also have to be concerned about the information to which you hyperlink.

Moderator McGuire: One of the pieces of advice I've always heard in addition to the ones that Mike has just summarized is that you have to be sure that your marketing guy isn't your webmaster. And I suppose that's less likely maybe in municipal finance than it is in corporate finance but there sometimes is a disconnect between what, you know, if you're basically putting up a tourism message on your city finances.

So that might be an important factor. I think we got a question from the audience, Frank, for you that was related to website management?

Mr. Hoadley: Yeah. And I think it touches on the question of entanglement also. And the question is how does Wisconsin coordinate or limit information being posted on links which are off of our server? And are the hotlinks limited to sites under a single control or a single official?

I would say honestly we probably don't take the precautions as extensively as have been described here. They are links to other state departments, they are links to information which has an extremely long history of being produced in a consistent fashion by people who we know to be responsible state officials. But we're not putting up the signs that say you're leaving our official disclosure site.

I think, though, there's – I think this question of entanglements is an interesting question and one that's of concern with us today. Just to take one more example, we have a large housing program called Veterans' Home Loan Program with almost a billion dollars of bonds outstanding. And the essence of pricing housing bonds, as you well know, is to understand the likelihood of call of those bonds at any point, one point in time prepayments. We have an extremely large number of maturities that are all subject to a cost call.

We get very frequent questions from the street every time a block of these bonds is up for bid. We get flooded with questions. We publish in our official statement a methodology that the state uses for selecting maturities. But applying that methodology to the database is another matter.

We suggested to a regional broker/dealer with a respected research capability that they might provide value to the state and value to the market if they undertook a research effort to consistently describe to the market those bonds using the state's methodology which are most likely to be called and those bonds which are least likely to be called.

The broker/dealer has responded by preparing what we think is a pretty good research piece which they have posted on their site. We think it's in our interest, we also think it's in the interest of investors in those bonds today that that information be generally made available to the street and to the market. We would like to include a reference to that research piece on our site. Yet, we're getting some pretty mixed signals about the nature of that language.

Mr. McAlevey: Yeah, I think that you're going to continue to get mixed signals about it until they, you know, some authority speaks definitively on it or it's resolved by the courts. It's a very – you know, it's really just a, in my mind a business decision.

You know, lawyers can talk about risk and, you know, I talk about the elements of the 10(b)(5) claim and all that sort of stuff. I think you just have to wait. You know, they have to put it in the balance. I mean, is making this information available to your investors more, you know, such that you are willing to take an increased risk of being responsible for the information that you're providing, providing to them in connection with that decision?

And it's really just a business decision because all we're talking about is risk and, you know, how you're going to allocate the risk. And, you know, to me that's a business decision.

Having said that, I think that there are some things that careful counsel can advise you to do which will really help you minimize that risk and make the business decision easier.

Mr. Fippinger: Yeah, this is a difficult one because the usual entanglement illustrations involve a situation where a company has ten analysts that are following the company. And the advice of law review literature is to be careful not to selectively hyperlink to the favorable reports, not the unfavorable reports. Due them alphabetically or in such order that doesn't show any preference.

Here you're dealing with a single report and yet it seems like it's material information that ought to be out there. I would be inclined to say go ahead and do it unless the issuer has any reason to believe that there is misinformation in the report. But if there is no misinformation in the report that you're aware of, seems to me like referencing an article or a press release that's a single item as opposed to a list.

Mr. McAlevey: Yeah, but that may impose a responsibility on the person establishing the link and that to actually review it. Because I'm not sure, you know, under the existing, the existing scienter standard case law, you know, that there is actual knowledge and there's recklessness. And to say, to simply say that you don't have any reason to know may not, you know, may not satisfy the scienter requirement.

Moderator McGuire: Yet in this market for underwriter due diligence, at least in competitive bid situations, we only require that you follow up on red flags in terms of recklessness. So I don't want to leave the sense that it's absolutely not manageable in terms of it, and I don't think you do either.

Mr. McAlevey: No. And I don't mean to suggest that. Indeed, I think it is, it is quite manageable. I am just saying that, you know, I think that there, you know, to Kate's very good point, I think the responsibility would be to take a look at that and to test it for red flags. But I don't think that you can say not look at it and say I don't have any reason to believe that this is materially false.

Moderator McGuire: So it's a sort of a reverse thing, maybe the issuer needs to look based on what your knowledge is and see if it looks like the broker/dealer did what you, you know, what you would have thought would have worked out.

It's interesting that this goes both ways. There's a question from the audience also which asks do the underwriters feel that they have any concerns about potential liability if they develop websites for their investors to access OS's or other information from. And do they feel in any way that that increases their risk other than the due diligence risk that they already have under 10(b)(5)?

Ms. Becker: No.

Moderator McGuire: That's a good answer. I likethat one. Might be wrong, but I don't see how.

(Laughter.)

Panelist: I'm glad I didn't answer that.

Moderator McGuire: No, no, I don't know how it would be. It seems to be that you have the same liability with respect to the paper document. I guess though you have that website management issue in terms of, you know, being clear, moving it into archives, that sort of thing. and I guess that's one of the dangers with websites is that they can get stale or out of date. And they do have to be actively managed.

But these legal issues tend to cause people to think, oh, well, this is never going to happen and it's not a good idea. And so I'd like to turn back to Mary to tell us again how you're using electronic information to actually make secondary market decisions. And I think that's more positive.

Ms. Miller: Yeah. I was going to say, we're leaving website on a very negative note here.

Moderator McGuire: I know. I'd like to go to a more positive note.

Ms. Miller: I think it's an area of just enormous promise to investors. I think the timeliness of dissemination of information, the fairness of dissemination are just huge issues. And I see our firm using the web more and more in the secondary market. And I am truly amazed at some of the information that is available that I think is really quite extraordinary for very small issuers that are providing quarterly updates on things that it's really quite amazing.

Some of the states have just incredible websites. You've heard about Frank's. We use that information all the time.

To give you one example, this year we were interested in the Y2K preparations that issuers were making. Very cumbersome to call thousands of issuers and ask them that question. But so many of them have posted information on the web that we could go and read and update throughout the year, it's very helpful to us.

We are beginning to see CAFRs, the annual audited financial reports come out on the web. That's still early on. But I think that's an area of enormous promise as well.

So I would say today the secondary market uses of the web are greater for us than the primary market, and for the reasons I talked about earlier, some of the practical issues. But I think it's something that is growing exponentially.

Moderator McGuire: Kit, what do you think?

Mr. Taylor: I, as I said earlier, I agree with Mary, I think that we're going to see more progress in the secondary market more rapidly than we are in the primary market in terms of finding ways to deliver the information to people.

The NCSHA pilot that we're working with, we're working with them, I see no reason why it can't be applied to other sectors where there can be an agreement between the investor community and the issuer community. And we'll be working with people over the coming year to see what we can bring about in that regard.

So I think that's, that is really where the promise is in the short run for this industry.

Moderator McGuire: What's the capacity of the MSRB to continue in this role? You've made great contribution so far.

Mr. Taylor: Well, in the system that we're using right now for the NCSHA pilot is by no means maxed out. And it is, it can be scaled up if necessary. It's just not, it's not a big deal once the document is originally produced all electronically. And that really is the hurdle that we've got in the primary market but we don't have that hurdle in the secondary market.

Moderator McGuire: Paul, I don't know how long this is supposed to last. I'm a bad moderator.

Mr. Maco: Five more minutes.

Moderator McGuire: Five more minutes. Good.

I'd like to give each panelist a chance to sum up or to pass if that's what you want to do.

Ms. Becker: I don't think I want to sum up because there's too much.

Moderator McGuire: Make any single point?

Ms. Becker: But one final point, and that is that, you know, we've been in a very unique interest rate environment. We've experienced historically low rates, limited credit spreads. And so there really hasn't been much spread with which to reward issuers for making good disclosure or making electronic disclosures. But, you know, the market goes up and the market goes down. And when we get back to 13.5 percent rates there will be ample spread to reward issuers for making good disclosure or electronic disclosure.

Mr. Marsh: Not this afternoon, I hope.

I think that the theme that we all embrace here is that electronic disclosure is a great thing. And I think that we are that far away from creating incentives to get to whether we folks belong on the format, I think that's important on the primary side of things. But, you know, to Joanne's point, there's going to be a point in time when we're going to rely much more heavily on our fundamental research people. You know, we also besides the interest rate environment have enjoyed an awful lot of insurance issue and stuff.

We are embracing this both on the institutional and the retail side. It is fraught with business/legal decisions. And, you know, to the extent that the SEC could give us more precise guidance as to the liabilities we have I think it will be very helpful.

Mr. Vislosky: I still think we're very much in our infancy in this regard. What we try to stress is let's expound continuity in the information that we're presenting and let's be consistent in the information we're presenting on behalf of our issuers. And we'll let the electronic disclosure take us where it may. But right now let's walk tenderly until we get a lot of these issues resolved.

Mr. McAlevey: Howard, you're prescient. We are currently in the Division of Corporation Finance in coordination with Market Regulation we are in the process of working on an internet release that is going to attempt to follow up on the guidance that was given in the '95 – in the mid-'90s on electronic delivery and some other issues.

And one of the areas that we're thinking about giving guidance, and I put a lot of emphasis on the word "guidance" because I'm not suggesting at all that what we're talking about here is safe harbor. We're talking – or exemptions from applications of the anti-fraud rules. I'm just talking about guidance here on what the responsibility may be for hyperlink material, you know, on an issuer's website and maybe some factors that would go into the analysis, or at least an analysis of whether or not the SEC would consider, you know, pursuing an enforcement action.

So I think that, you know, these are ideas that we have to – that we're grappling with right now. And I don't want to make any promises, but these are things that we're thinking about. And we appreciate the need out there for guidance on these type of topics.

Mr. Hoadley: I guess I'd like to address a couple of remarks very specifically to the SEC in this regard, and that is if you want the participation of the majority of issuers in a process of electronic disclosure you're going to have to give them more comfort than can be derived today.

The SEC, this panel, this meeting is dealing in some very sophisticated concepts of securities law. The concept of fraud that is used by the SEC is far different than what ordinarily people think of when they think of the word fraud. The concept of facts and circumstances is lost on most local government officials. And until there is some really bright line guidance and some safe harbors I think it's going to be very difficult to draw into this process many small bond issuers.

Ms. Miller: I would just say that I think electronic disclosure is the direction we're headed in and we're going to get it whether we like it or not. But I think it offers a great deal to the investment community in terms of productivity, dissemination of information. We certainly are embracing it and will try and work through some of the difficult issues you've touched on and some other people have today. But I think that the sooner the better as far as we're concerned.

Mr. Taylor: I'd echo that. Ward talked about us being that close. To deal with that gap there is going to take a hard work with a lot of groups and who are represented in this room. And I would hope that everyone would enter into those discussions which will have to take place in a very cooperative spirit. We look forward to working with people to try to achieve that.

Mr. Fippinger: Well, I agree with all of Mike's cautionary language and the practical advice he gave for managing a website. And I particularly appreciated his using the word "notice" rather than "disclaimer." It's much easier to notice the public that you are leaving the issuer's website than disclaim responsibility.

But the bottom line I think comes back to a theme that Alan Anders was emphasizing this morning which is it takes active management. And if a website is properly managed I think the risks are fairly minimal.

Moderator McGuire: I'd like to thank you all, all the panelists, and also those of you in the audience who gave us questions.